Earthquake Losses May Be Limited for Japanese Non-Life Insurance Providers

Japanese non-life insurers may face limited losses from the country’s strongest earthquake because of contingency reserves and an exclusion from insuring damaged nuclear plants, analysts said.

MS&AD Insurance Group Holdings (8725) Inc., Tokio Marine Holdings Inc. (8766) and NKSJ Holdings Inc. (8630), the three-biggest non-life insurers, may have 20 billion yen ($250 million) to 80 billion yen each in commercial losses, according to Keefe Bruyette & Woods Inc. The three have set aside about 88 percent of their 593.2 billion yen maximum liability, Fitch Ratings said.

Losses at Japan’s casualty insurers from the March 11 earthquake, the world’s fourth strongest since 1900, may differ from temblors such as the Feb. 22 New Zealand quake because they are protected under a government framework that limits coverage. Commercial and industrial risks are passed on to the reinsurance market, according to Fitch.

“The direct impact on the casualty insurers will be limited,” said David Threadgold, a Tokyo-based analyst for Keefe Bruyette. “Earthquake and tsunami are explicitly excluded from nuclear coverage under the Atomic Energy Insurance Pool, so there is no coverage provided by insurers.”

Non-life insurers have set aside reserves for earthquakes that they can tap for claims, according to Japan’s General Insurance Association, while the Japan Earthquake Reinsurance will pay all losses amounting to 115 billion yen on residential earthquake insurance, it said.

MS&AD rose 3.2 percent, Tokio Marine advanced 2.9 percent and NKSJ climbed 4.4 percent at the close of trading in Tokyo, with all of their shares gaining for the first time in five days.

Kobe 1995

Before this earthquake, the most destructive temblor to hit Japan struck Kobe, Osaka and Kyoto in 1995, costing insurers about $3 billion, not taking inflation into account.

The March 11 quake -- updated to a magnitude of 9, from 8.9, by the U.S. Geological Survey -- and subsequent tsunami have led to what Prime Minister Naoto Kan called the country’s worst crisis since World War II. Tokyo Electric Power Co., locally known as Tepco, is battling to prevent a nuclear catastrophe at its earthquake-damaged Fukushima plant 220 kilometers (135 miles) north of the capital.

Stocks rebounded today from a 16 percent drop in the Topix index in the past two days, the most since 1987. The quake also prompted the Bank of Japan (8301) to pour record funds into the economy. The Topix jumped 6.6 percent at the close.

Standard & Poor’s Ratings Services cut its outlook on the Japanese non-life insurance industry to negative from stable, citing concerns that declines in stock prices following the earthquake may weigh on their earnings.

‘Well Under’ Reserves

Total claims payments for losses from the earthquake and tsunami will probably exceed those recorded after the 1995 temblor, S&P said. Still, the total payout will be “well under” the insurers’ contingency reserves, it said.

The insured property losses from the earthquake in Japan may be as much as 2.8 trillion yen, according to AIR Worldwide. The disaster modeler is working to quantify losses related to the surge of water that swept into northeast prefectures including Miyagi, Fukushima, Ibaraki and Iwate, said Jayanta Guin, senior vice president of research and modeling.

The quake, which may have killed more than 10,000 people, could cost the global insurance industry as much as 2.8 trillion yen in claims, according to AIR Worldwide. The official death toll as of midnight was 3,373, according to the National Police Agency in Tokyo.

Halting Stock Buybacks

Insurers and reinsurers have been returning capital to shareholders through dividends and stock repurchases as the prices businesses pay for coverage decline. The latest quake may stop stock repurchases by most reinsurers and may push down share prices this year, a Deutsche Bank AG analyst said. Reinsurers in the U.S. and Bermuda are already facing almost a full year’s worth of losses in the first quarter, said Joshua Shanker, a New York-based analyst at Deutsche Bank.

Japan’s residential earthquake insurance is structured so that a large part of the risk is reinsured to the government. The coverage for nuclear power also comes under the government, not local insurers.

“Japanese insurance companies have appropriate levels of reserves and capital and it should not have significant impact on their business or claim payments,” Japan’s Financial Services Minister Shozaburo Jimi said at a press conference on March 15.

Japanese casualty insurers will probably have to pay claims totaling 10 billion yen to 20 billion yen to cover losses due to earthquake damage to cars and for fire, according to Natsumu Tsujino, a Tokyo-based analyst at JPMorgan Securities Japan Co.

More Losses

Payments against losses on commercial property, cargo, marine vessels, and factories will be around “several tens of billions” for the industry as a whole, Tsujino said.

Japan’s earthquake follows the New Zealand temblor that wrecked the central business district of Christchurch. The government said earlier this month it may need to borrow more money and reconsider spending plans after New Zealand’s deadliest earthquake in 80 years caused as much as NZ$15 billion ($11 billion) in damage.

“While the March 11 earthquake in Japan will be among the largest insured losses in history, such loses can be absorbed by the insurance and reinsurance industries without widespread solvency problems, or undue financial strain,” Fitch Ratings wrote in a report issued on March 14. The rating firm added that the initial assessments are subject to change as new information becomes available.

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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